Rising inflation triggered a dramatic increase in Social Security’s annual cost of living adjustment, or COLA, for 2022. The Social Security Administration on Wednesday announced the COLA of 5.9% after a report from Ministry of Labor on inflation in September.
Over the past 10 years, Social Security’s COLA has averaged around 1.7% per year while inflation has remained low. But the economic recovery after the coronavirus pandemic has triggered a rise in the prices of a wide range of goods and services, which will translate into bigger checks for retirees.
WHY ARE SOCIAL SECURITY BENEFITS ADJUSTED AND WHAT IS COLA BASED ON?
Policymakers say COLA strives to preserve the purchasing power of social security benefits and should not be seen as a pay rise for retirees.
COLA is calculated based on the Consumer Price Index for urban and office workers, or CPI-W, according to CNBC. The consumer price index, which measures a basket of everyday goods as well as various energy goods, rose 5.3% in August.
At one point, Congress had to approve increases in inflation, but from the mid-1970s, lawmakers handed that function over to non-partisan experts within the government bureaucracy. The annual review is now linked to changes in an official inflation measure and takes place automatically and without any political policies.
WHAT IS THE SOCIAL SECURITY COLA FOR 2022?
The Great Recession saw a 5.8% increase in COLA for 2009, and next year’s figure is just a cut above that.
But you have to go back almost 40 years to find a bigger COLA boost, the 7.4% allocated for 1983.
Next year’s number won’t come close, but it’s still the biggest Social Security hike the vast majority of baby boom retirees have seen. So far, they’ve collected meager to modest annual adjustments, not counting three years for which there has been no COLA as inflation has barely shown a pulse.
A COLA of 5.9% will increase the average Social Security payment for a retired worker from about $ 92 per month, to $ 1,657 next year. Compare that to this year’s COLA, worth around $ 20 per month.
CONSUMER PRICES ARE INCREASING. WILL THE INCREASE IN COLA BE ENOUGH?
As the economy recovers from the shock of coronavirus shutdowns, prices are rising at a pretty good pace.
The gas serves as a ubiquitous booster, above $ 3 a gallon in most states, $ 4 a gallon in California and Hawaii. But food had already risen, as had labor costs, as employers compete to hire demanding workers in search of higher pay and better benefits. Add to that the supply chain issues that have slowed deliveries of everything from refrigerators to running shoes.
All of this is reflected in the prices that consumers pay for their daily needs. So while beneficiaries will likely see additional income next year, it might not go that far due to the price hike.
A recent report from the Center for Retirement Research at Boston College highlighted another factor that could reduce the purchasing power of seniors despite a higher COLA: Medicare Part B premiums for medical and outpatient services which are usually deducted directly from Social Security checks for retirees are also expected to go up.
WHO WILL HAVE A COLA IMPACT?
The COLA is large enough to have an impact on the overall economy.
It affects the household budgets of about 1 in 5 Americans, including Social Security recipients, disabled veterans, and federal retirees, or roughly 70 million people.
About half of older people live in households where social security benefits represent at least 50% of their income, and a quarter depend on their monthly payment for all or almost all of their income. For the latter group, COLA can literally make a difference in what they are able to put on the table.
DO PRIVATE PENSIONS ALSO OFFER A COLA?
Protection against inflation is central to the design of social security benefits, but it is not so common among traditional private pensions. The benefits paid by most employer plans gradually lose some of their purchasing power over the years.
Social Security not only increases retiree checks to offset inflation, but then adds that amount to a person’s underlying benefit so that it increases with membership as future COLAs are factored in. .
CAN SOCIAL SECURITY ALLOW ITSELF TO CONTINUE PAYING COLA?
Proposals have been launched to increase or reduce COLAs in the context of a wider social security overhaul. Many advocates for the elderly argue that the inflation index currently in use does not adequately reflect the higher healthcare costs faced by the elderly.
On the flip side, groups pushing to cut federal deficits are urging a switch to another measure of inflation that takes into account consumers’ habit of substituting cheaper products when prices rise. This would give slightly lower estimates of the changes in the cost of living.
Social Security administrators said in their report this year that the program’s long-term fiscal imbalance casts a longer shadow.
For the first time in 39 years, the cost of benefits will exceed total Social Security income from deductions and interest on wages. From there, Social Security will have to draw on its savings to pay the full benefits.
The report also moved the date for the exhaustion of the massive Social Security trust fund to 2034 by one year. At this point, the program will only be able to pay 78% of planned benefits, according to the report.
Such a reduction would represent a major hardship for most people who depend on Social Security, even middle-class retirees.
But hardly anyone with political power in Washington talks about fixes.
“Social security is an issue that really needs to be tackled together by both parties,” said David Certner, director of legislative policy at AARP. “It’s very difficult to do bipartisan work on something as big and important as Social Security in a very partisan atmosphere.”